As I have long pointed out here, Bitcoin is not a libertarian answer to avoiding the government. It is a very trackable instrument. It is far more trackable than cash or gold.

Russell Brandom at The Verge explains why the confused belief in the anonymity of Bitcoin may ultimately do in Silk Road founder Ross Ulbricht:

For years, Bitcoin has been the Silk Road's biggest strength. Escrow wallets let money change hands safely and easily, bitcoin tumblers let users keep drug transactions at arm's length, and, for a while at least, it kept everyone off the radar of law enforcement. In return, the Silk Road gave Bitcoin its first major infusion of die-hard users, a base that would drive the currency higher and higher.

But now, as Ross Ulbricht defends himself against charges of running the Silk Road and profiting from drug transactions, Bitcoin may be the single biggest problem for his defense. The same features that made Silk Road possible have now turned against him, and casual observers are realizing that Bitcoin isn’t as anonymous as they thought. The public Bitcoin ledger details Ulbricht's enormous financial holdings and a wealth of potentially incriminating transactions. Now that his wallet address has been discovered, the perfect anonymity tool has turned into the perfect source of evidence. Skeptics sometimes called the currency "prosecution futures," and now it looks like some of those futures are coming due...

"Bitcoin is insanely traceable," says Nicholas Weaver, a researcher at UC Berkeley's International Computer Science Institute. "The Silk Road bitcoins are well known, not just the ones seized but the entire cloud of Bitcoins. Add in the known purchases from law enforcement, and it becomes downright trivial to create the "history cluster" that is Silk Road." This kind of tracing has become a popular subject for Bitcoin-minded academics, and with access to the Silk Road's server logs, there should be plenty of evidence connecting Silk Road transactions to Ulbricht's personal wallet, which was seized as part of the initial raid. That's not the same as convincing a jury, but it's likely to cause serious problems for Ulbricht's defense in the very near future.

Blockchain problems have also cropped up in the defense's treatment of the $28 million found in Ulbricht's Bitcoin wallet. The defense is claiming it was simply currency-trading revenue, created by the astronomical rise in the value of Bitcoin over the period in question — but the blockchain makes it easy to check that claim. Prosecutors can easily see all the transactions that wallet made. "Making the claim that this was revenue from trading is a very dangerous claim to make," says Weaver. "The defense attorney better hope Ulbricht really was a brilliant Bitcoin trader, because that defense is easy to shred otherwise." If Ulbricht really did control 144,000 bitcoin in 2011, that money would show up in the wallets he controlled at the time. If the money can't be found, it suggests the currency-trading story isn't much more than hot air....

Ironically, it would have been much easier to conceal these assets in the traditional financial system. Conventional money laundering is still an enormous headache for prosecutors, and subpoenaing the transaction records for an offshore bank is much harder than simply checking the blockchain..

All these issues stem from a misunderstanding of Bitcoin itself. The service isn't technically anonymous: it's pseudonymous. Each wallet has a hard and persistent identity and a wealth of data associated with that identity. If you don't know who's behind a given wallet, that looks a lot like anonymity, but once a person is tied to a given wallet, their financial activity becomes instantly and painfully public.﻿